Forget the iconic oilman hoping to hit the big one. Some of today’s energy plays aren’t so glamorous, as horizontal oil and gas drilling in shale formations change the way longtime investors think.
“The industry has moved away from the romantic allure of the wildcatter,” said Jim Whipkey, co-CEO of Hi-Crush Proppants. “We know the resources are there. It’s a matter of getting them out of the ground economically.”
With hydraulic fracturing, that takes sand, along with water and chemicals, pumped at high pressure into a perforated well to fracture the dense rock formations and release oil and natural gas.
Hi-Crush Proppants, through its Hi-Crush Partners, began operating a 600-acre sand mining facility in Wisconsin in July 2011, producing Northern White monocrystalline sand for use in hydraulic fracturing.
Hi-Crush Partners launched an initial public offering last month, and its units closed Thursday at $21.32 on the New York Stock Exchange, well above the $17 per unit initial pricing. Hi-Crush Proppants still owns 52.6 percent of the limited partnership.
The prospectus for the IPO listed $20.4 million in revenue for Hi-Crush Proppants during five months of operations in 2011.
The hydraulic fracturing sand industry has grown quickly over the past few years as shale plays have expanded across the country – so much so that the field has become crowded, said Mukul Sharma, a professor of petroleum and geosystems engineering at the University of Texas at Austin.
But in its filing with the Securities and Exchange Commission, Hi-Crush Partners said it believes the market will continue to grow.
Whipkey said he expects that to happen even as low natural gas prices reduce the natural gas rig count. The oil rig count has gone up at the same time, he said.
And he said demand for proppant – sand, ceramic and other natural or man-made particles sorted for size and sphericity and used to keep fractures open in shale drilling – had become less dependant on rig count as companies use more proppant in each stage and create more fractures per well.
A report issued Sept. 14 by Raymond James analysts J. Marshall Adkins and James M. Rollyson said the combination of low operating costs and long-term contracts for Hi-Crush sand, along with the trend of increased proppant use per well, favors the company.
Hi-Crush Partners runs out of an office building north of the Galleria in Houston, more than 1,200 miles from the sand operation at its Wyeville, Wis., facility about 170 miles northwest of Milwaukee.
The facility can produce 1.6 million tons of sand per year and has four long-term contracts to produce nearly 1.5 million tons annually, said Laura Fulton, chief financial officer for Hi-Crush.
According to the SEC filing, the facility has a reserve of 33 years.
Hi-Crush may build or acquire more reserves to expand capacity, Whipkey said.
It will use money from the IPO to pay off debt accrued to build the Wisconsin facility, he said.
The American Petroleum Institute sets specifications for fracturing sand, allowing buyers to know what size and strength they’re getting.
Whipkey and Fulton said Hi-Crush will focus on Northern White sand found in Wisconsin and the upper Midwest, the heart of the fracturing sand industry.
There also are fracturing sand operations elsewhere, including near Brady in Central Texas, but Northern White is considered the best quality because of its crush-resistance.
Sharma said crush- resistance, plus uniformity of grain size, is the most important properties in fracturing sand.
Critics have raised concerns about health and environmental problems tied to sand mining, but Sharma said those are manageable if people take what he called “normal precautions, wearing a filter or mask when around a lot of open sand, avoiding breathing in particulates.”
City Administrator Jim Bialecki of nearby Tomah, Wis., said he occasionally hears concerns about potential environmental problems among his nearby town’s 9,100 residents, but most people support the sand plants.
Whipkey said sand mining was a natural extension in the energy business for him and Hi-Crush co-CEO Bob Rasmus.
Both had been involved in unconventional drilling, and investing in the components required to fracture a well seemed the logical next step.
“Unconventional resource development is critical to domestic energy security, and that’s what we feel we’re contributing to,” Whipkey said. “It’s here. It’s in this country.”